Number Go Up: Inside Crypto's Wild Rise and Staggering Fall

by Zeke Faux

A blockchain is a database. Think of a spreadsheet with two columns: In Column A there’s a list of people, and in Column B there’s a number representing how much money they have.

With the Bitcoin blockchain, the numbers in Column B represent Bitcoins. And the people in Column A are identified by strings of random characters instead of names. That’s it. That’s what Bitcoins are—numbers in a spreadsheet. There is nothing else. Without the spreadsheet, the Bitcoins don’t exist. If we were talking about the Dogecoin blockchain, the numbers in Column B would represent Dogecoins. Tethers are just numbers in a spreadsheet like this too. (Technically, a blockchain is a list of all transactions ever made, which is compiled into something like this spreadsheet by software, but close enough.)

TWO-COLUMN LISTS LIKE the one above have always been at the core of the financial system. That’s the central function of a bank: keeping track of how much money each customer has.

The technical innovation of blockchain is that it lets customers get together and maintain the list themselves, with no banker involved. If I want to transfer 1,000 Bitcoins from my account to someone else’s, there’s no handsy banker to call. So instead, my computer broadcasts the transaction to all the computers that run the Bitcoin network, sending all the other Bitcoin people a message that says, “Hey, I’m transferring 1,000 Bitcoins to another account.”

The problem was that someone could try to spend the same Bitcoins twice at the same time—more or less cutting and pasting money. The solution that Bitcoin uses to prevent this “double-spending problem” is called “mining,” and it’s incredibly complicated and confusing. It also uses so much electricity that the White House has warned it might prevent the United States from slowing climate change. It’s like something out of the world’s most boring dystopian science-fiction movie. I will attempt to explain. Here goes: Once enough messages about transactions come in, some computers in the network called miners compile the batch into what’s known as a “block.” They confirm that I actually have 1,000 Bitcoins and that I haven’t already sent them to someone else. Then they make the block official and add it to the existing list of blocks—the blockchain. But these miners don’t just hold a vote on whether the transactions are valid. That would require trusting a vote-counting system. Instead, the miners have to compete in an impossibly hard guessing game to generate a random number—as of 2023, the odds were 75 sextillion-to-1 against a correct guess. The winning miner gets to publish the block and update the ledger, and they get a reward of six and a quarter brand-new Bitcoins, created out of the ether automatically. The difficulty of the game automatically increases when more miners enter it.

THE FUNDAMENTAL ABSURDITY of all this is that the numbers in the Bitcoin blockchain don’t represent dollars, or even have any inherent tie to the financial system at all. There’s no reason why a Bitcoin should be worth more than a Dogecoin or any other number in any other database. Why would someone burn massive amounts of coal just to get a higher number written in the blockchain for their account? At first, the theory was that Bitcoin’s value would go up once it became part of the mainstream financial system. The idea was that if Bitcoin was a superior financial technology, then lots of people would want to use it for their financial transactions. And if lots of people wanted to use it, they would need to first buy some. When that didn’t happen, Bitcoiners started referring to the currency as “digital gold.” Nakamoto’s design limited the total supply of Bitcoins to 21 million. They argued that the limited supply meant the currency’s price was sure to rise. But, of course, just because the supply of something is limited doesn’t make it valuable—only 21 million VHS tapes of Pixar’s Toy Story were made at first, and you can get an original on eBay for three dollars. For Bitcoin believers, the rising price became its own justification. On stage in Miami, many of the speakers resorted to a sort of illogical reasoning: The price of Bitcoin will go up because it has gone up. They wielded this circular argument to ward off doubt and call forth a future of infinite bounty. It bec...

most people weren’t using cryptocurrencies to buy stuff. Instead, they were sending regular money to exchanges, where they could then bet on coin prices. The crypto exchanges, like Bankman-Fried’s FTX, were essentially giant casinos. And many of them, especially in the early days of crypto and outside the United States, couldn’t handle dollars because banks wouldn’t open accounts for them, wary of inadvertently facilitating money laundering. This was where Tether came in. When customers wanted to place a bet, they first bought some Tethers. It was as if all the poker rooms in Monte Carlo and the mahjong parlors in Macau sent gamblers to one central cashier to buy chips.

Willett’s plan was innovative. It was also illegal. What Willett did was a textbook example of what the U.S. Securities and Exchange Commission calls an “unregistered securities offering,” meaning that Willett was selling an investment opportunity without any of the usual safeguards. Willett told me that the agency probably would have fined him hundreds of thousands of dollars if it had noticed what he was up to. But luckily, the regulators weren’t reading Bitcoin message boards.

The problem was that Tether, like other cryptocurrencies, broke just about every rule in banking. Banks keep track of everyone who has an account and where they send their money, allowing law enforcement agencies to track transactions by criminals. Tether would check the identity of people who bought coins directly from the company, but once the currency was out in the world, it could be transferred anonymously, just by sending a code. A drug lord could hold millions of Tethers in a digital wallet and send it to a terrorist without anyone knowing.

These new tokens were sold by start-ups to fund the development of apps, just like Willett did with MasterCoin. Their founders promised the coins would be useful once the apps were created. It was as if the Wright Brothers sold air miles to finance inventing the airplane, in the words of Money Stuff columnist Matt Levine. A new programmable blockchain called Ethereum made the process easy. The token sales were called “initial coin offerings,” or ICOs.

These ICO-funded start-ups promised that blockchain would revolutionize commerce by enabling provenance to be tracked and verified. Even big companies like IBM and Microsoft started saying that they would put practically everything on the blockchain: diamonds, heads of lettuce, shipping containers, personal identification, and even all the real estate in the world. It seemed like blockchain-powered ICOs were the practical use that crypto had been waiting for. But there was one problem. None of this stuff ever advanced beyond the testing phases, if anyone bothered to even do that. Most ICOs were scams. And they weren’t actually an innovative form of fraud. ICOs made it easier to run a scam that’s about as old as the stock market. It’s called a “pump-and-dump” scheme.

Shares—or in the case of crypto, coins—are distributed at low prices to insiders, who trade them back and forth at higher and higher prices to create the appearance of demand. An aggressive sales pitch coupled with the rising share price brings in new investors. Some of the people who buy in are gullible. But most think they understand the game: Buy early, ride the wave, and sell before the inevitable crash.

But running a stock scam is a lot of work. It requires crooked lawyers, brokers, and bankers to draft reams of securities paperwork, even if all the information in them is false. And that leaves a paper trail that pretty much inevitably leads to the scammers getting busted. Crypto didn’t require any of that. All it takes is some rudimentary programming, which can be done by freelancers hired online, and some posts by a social media influencer.

By early 2017, Bitfinex was keeping its money in several banks in Taiwan. But the way the international financial system works, running an exchange required the cooperation of other banks too. Bitfinex’s Taiwanese bankers relied on other banks—known as correspondents—who acted as middlemen to pass money from Taiwan to customers in other countries. But the correspondent banks frowned on crypto. One by one, they stopped processing transactions for Bitfinex and Tether. The last one, Wells Fargo, cut them off in 2017. Then the Taiwanese banks closed their accounts. This meant that Bitfinex’s money was stuck in Taiwan. It literally couldn’t be transferred overseas. Devasini and his colleagues got so desperate to get the money out that they considered chartering a jet and flying pallets of cash out of the country. They tried suing Wells Fargo but quickly dropped the case. But somewhere in the United States, an I.T. worker in his early thirties spotted the filing for the abortive lawsuit after it hit the court docket. He couldn’t believe what he was reading. Tether was supposed to be backed by real U.S. dollars in a bank. But in the lawsuit, the company itself admitted it had no access to the banking system. What was especially odd was that even after filing the case, Tether kept issuing coins. It created 200 million new ones that summer. But was anyone even sending in the corresponding $200 million, if the company didn’t have a functional bank account?

“You should be suspicious of any financial business that declines to be transparent with its holdings, and refuses regulation and transparency,” he said.

United States money-market funds avoided buying Chinese debt, because they viewed the country’s opaque financial system as risky, and, at the time, investors were speculating that the Chinese property market was in a dangerous bubble. Tether’s portfolio appeared to have debt issued by government-linked companies like Shanghai Pudong Development Bank, and real-estate developers like Shimao Group.

What I’d learned so far about Tether was inconclusive, but completely sketchy. I couldn’t believe that every day, people sent millions of perfectly good U.S. dollars to the Inspector Gadget creator’s Bahamian bank in exchange for digital tokens conjured by the Mighty Ducks guy and run by executives who were targets of a U.S. criminal investigation.

But so far, he’d donated less to charity than he’d spent on celebrity endorsements, marketing, and lobbying in Washington, D.C. He seemed like a thought experiment from a college philosophy seminar come to life. Should someone who wants to save the world first amass as much money and power as possible, or will the pursuit corrupt him along the way?

There was one arbitrage in particular that Bankman-Fried wanted to take advantage of. On exchanges in Japan, Bitcoin generally traded at higher prices than on U.S. exchanges. If one Bitcoin cost $6,000 in the United States, it would go for the equivalent of $6,600 in yen in Japan. In theory, someone could earn a 10 percent return by buying a Bitcoin on a U.S. exchange, sending it to a Japanese one, selling it, and converting the yen back to dollars. That’s an unheard-of return. At that rate, in a little more than four months, $10,000 would turn into $1 billion. The main obstacles to the Japan arbitrage were practical. Sending that much money back and forth rapid-fire looked like money laundering to banks, and telling them it was actually cryptocurrency trading was hardly reassuring.

Owning an exchange (FTX) and a firm that trades on it (Alameda) was an obvious conflict of interest. On Wall Street it wouldn’t have been allowed, due to the risk that the trading firm would be given preferential treatment or access to confidential information.

“I honestly think it’s negative EV for me to cut my hair,” Bankman-Fried said, citing expected value as always, according to the colleague’s memory of the conversation. “I think it’s important for people to think I look crazy.”

“Does it ever get boring to win so much?” the moderator asked. “I get a little desensitized,” Bankman-Fried said. “I never get tired of winning,” Brady said.

At a party for a project called Degenerate Trash Pandas, I asked one coder if crypto would ever be helpful for regular people. “Why is it that you think that is important?” he said to me, in a tone of total sincerity. “I really would like to know.”

There’s nothing stopping anyone from simply right-clicking Justin Bieber’s ape and downloading the image file to their computer. The replica is indistinguishable from the $1.3 million original, and perfectly usable for a profile picture. What a Bored Ape buyer pays hundreds of thousands of dollars for is not a digital ape cartoon—it’s the ability to prove they are the one who paid hundreds of thousands of dollars for a digital ape cartoon.

This was supposed to be the future of the internet and art and commerce. Instead, it had turned online shopping—a process so seamless and fun that some use it for self-soothing—into a terrifying ordeal.

“I think decentralization is good, and I think blockchain technology and cryptocurrency can be great,” Chappy said to another reporter. “But when you get slapped in the face with losing your whole retirement savings, you can’t help but go, ‘Hey I sure wish there was some kind of regulation that would have prevented this.’ ”

Crypto bros routinely claimed that anonymous, untraceable payments on the blockchain would somehow help the world’s poor. But it seemed like none of them had bothered to look into what their technology was actually being used for. Tricking Filipinos into going into debt for a pipe dream based on Smooth Love Potions was bad enough. But aiding and abetting enslavement?